SA Revenue Service shortfall to blame for VAT hike – Treasury

Treasury would not have needed to increase value added tax by one percentage point to 15% in April if not for the revenue shortfall at the South African Revenue Services (SARS), deputy director general at National Treasury Ismail Momoniat told the Nugent Commission of Inquiry on Wednesday.

According to Momoniat, Treasury hopes to raise R25bn from the VAT rate hike in the 2018/2019 financial year - if no further zero-rated items are added to the basket of goods that are exempt from VAT.

Momoniat, who is the head of tax and financial sector policy at Treasury, testified alongside other Treasury officials at the commission probing administration and governance at the tax agency.

"You need to be cleaner than clean. If you’re not, [this] will impact on tax morality, and that has huge impact for the country," he said.

He also claimed that there didn’t seem to be political will within the revenue agency to prevent illicit financial flows.

Momoniat questioned why external legal teams were brought in to undertake investigations at SARS, such as law firm Hogan Lovells, how procurement processes were followed and why the tax agency's internal legal unit wasn’t used.

"SARS has become more and more opaque," he said.

SARS commissioner too powerful

Judge Robert Nugent asked Momoniat to go through his submission on proposed amendments to the way SARS functions.

Momoniat said he was part of the team that worked on drafting the Public Finance Management Act (PFMA) in 1994, and this legislation, which governs public institutions, was based on the euphoria of the period and the assumption that corruption would never be tolerated.

"If we had to do the PFMA again, [it] would have stronger measures if things fall apart," Momoniat said.

"The [SARS] commissioner is too powerful. The structure, the bonuses rest with the commissioner. Even when the AG (Auditor General) found the bonus payments were irregular,” he said.

However, Nugent said that power couldn't be divided - it had to rest somewhere ultimately, and the commission was looking to ensure necessary checks and balances were in place.

Momoniat suggested a model like that used at South African Reserve Bank, where there is an independent board which the governor chairs.

Nugent asked Momoniat to develop his suggestions further and submit a memorandum to the commission.

The Davis Tax Commission previously recommended that the SARS commissioner be appointed through a parliamentary process, instead of by the president.

Unexplained drops in shortfall

Chris Axelson, a director at Treasury for personal income and taxes, took the commission through a series of slides showing the reasons behind the R48.2bn collection shortfall in 2017/2018.

Moyane, despite criticism from former Finance Minister Pravin Gordhan, claimed that SARS was unable to meet its revenue targets due to weak economic growth affecting revenue.

Axelson said the "huge decrease in import taxes" and other revenue streams could "largely be explained by the economy".

But he said there were very small changes to the wage bill in 2017/2018, while there was still a large shortfall in personal income tax collections.

According to Axelson, the underlying data didn't support Moyane's claim that it was sluggish economic growth alone that contributed to the revenue shortfall as there were "unexplained drops". He said they were unable to pinpoint the reasons for the tax collection gap.

Treasury’s director-general Dondo Mogajane concluded Treasury’s submission by telling the inquiry a well-functioning tax agency was good for democracy.

"If SARS is not collecting, the country [still] has to run; the country will have to borrow more," Mogajane said.

The inquiry continues on Thursday, with testimony from international consultancy firm Bain & Company about their role in the SARS 2015 restructuring process, which was blamed by several witnesses last week for the drop in compliance and collections.